From April 2026 the current 100 per cent rate of relief for agricultural and business property will be restricted to the first £1 million only.
The rate of relief for transfers of farms and other business property in excess of this value will attract relief at a rate of only 50 per cent.
Inheritance Tax (IHT) is charged at 40 per cent on death so the impact of the above measure will be that any business property in excess of £1 million value may be taxed at an effective rate of up to 20 per cent on death, depending on the circumstances.
The announcement, if enacted, will have significant and far-reaching consequences for some farmers and other business owners who, faced potentially with the prospect of a significant IHT charge on death, will now be forced to reconsider their options.
We can probably expect to see a significant amount of succession-planning activity in the coming months, with many business owners (and particularly farmers and other landowners with significant estates) looking at options to accelerate the transfer of assets to children or grandchildren, perhaps doing so in their lifetime rather than on death.
This could be done directly or perhaps via trust structures.
For farmers and other business owners who are relatively young and in good health, taking out insurance against an unexpected IHT liability may be another avenue to consider.
In a further blow to taxpayers who have saved diligently, the Chancellor also confirmed that with effect from 6 April 2027, unused pension funds and death benefits payable into a person’s estate will again form part of the individual’s estate for IHT purposes.
This returns the IHT treatment of pensions to the position as it was before the 2015 reforms.
This measure is likely to prompt those with significant assets to revisit their IHT planning, because pension funds that have not been exhausted at death will now once again be exposed to IHT.
We could see an increase in the numbers of people withdrawing their Tax-Free Lump Sum, in order to spend it or gift it to their children or grandchildren during their lifetime.
Because of the above measures we are likely to see a significant increase in lifetime gifts of assets (particularly business assets), because donors will look to avoid IHT charges that would otherwise arise on death.
Gifts made to individuals during a donor’s lifetime remain outside the estate on death, provided the donor survives seven years from the date of the gift.
However, taxpayers need to be careful not to inadvertently trigger Capital Gains Tax charges when gifting assets, so professional advice should always be sought.
If you’re looking for advice on this, please contact our tax advisers.
